Earlier this month, in her first public speech as the Federal Reserve’s Vice Chair for Supervision, Michelle Bowman laid out her vision for how the central bank should oversee and regulate US banks. At the heart of her approach is pragmatism: identifying problems, crafting efficient solutions, analyzing both intended and unintended consequences, and considering alternative approaches that might produce better results at lower cost.
Bowman outlined how her pragmatic approach can improve the Fed’s oversight of the banking system. She focused on four key areas:
- Enhanced Supervision: Enhancing supervision to better achieve the Fed’s safety and soundness goals;
- Bank Capital: Reforming the capital framework to ensure it aligns with the structure of the US banking system;
- Regulatory Review: Reviewing existing regulations to ensure the framework remains viable; and
- Bank Applications: Making the application process more transparent, predictable, and fair.
Enhancing Supervision
Bowman identified five changes the Fed could adopt to better focus supervision on material financial risks that threaten the stability of the banking system—and to ensure those risks are addressed promptly.
The first change she proposed was applying a more tailored regulatory and supervisory approach. As she explained, the Fed has historically “‘pushed down’ requirements developed for the largest firms to smaller banks, often including regional and community banks,” which has led to “the gradual erosion of distinct regulatory and supervisory standards among firms with very different characteristics.” As a result, smaller, community-focused banks are increasingly subject to rules designed for the largest and most complex institutions that are often ill-suited to their specific circumstances.
The second change Bowman proposed was reforming the supervisory ratings system. This reform would be aimed at addressing “the gap between assessed ratings and material financial risk.” For example, recent data showed that two-thirds of the nation’s largest banks were rated unsatisfactory, even though most met the Fed’s capital and liquidity expectations. In short, she argued, the current system fails to accurately reflect the financial condition of the institutions the Fed supervises.
Third, Bowman raised concerns about examiner priorities. She argued that “supervisory focus has shifted away from core financial risks (credit risk, interest rate risk, and liquidity risk, for example), to process-related concerns. She called for a shift in focus back to these substantive areas. Bowman also criticized the tendency among examiners to assume that more complex practices are inherently superior and to hold all banks to those standards—even when simpler approaches may be more appropriate for a bank’s size, scope, or risk profile. Echoing her earlier support for regulatory tailoring, she stressed the need for greater transparency in examination outcomes and emphasized that banks should be evaluated based on their individual circumstances.
The fourth change Bowman addressed was the role of guidance in the supervisory process. She emphasized that guidance should clarify supervisory expectations, offer direction on the permissibility and risks of new activities, and help institutions comply with applicable laws and regulations. However, she noted, “[w]here guidance does not further these objectives, it is worth revisiting.” At its best, guidance promotes transparency and provides firms with a clear understanding of what regulators expect—thereby enabling responsible innovation. Bowman noted that uncertainty around supervisory expectations has long been a barrier to innovation. Regulators, she concluded, must foster an environment where financial institutions can innovate without compromising safety and soundness.
The fifth change Bowman proposed was improving examiner training. Although becoming a commissioned examiner requires rigorous study and testing, the Fed does not currently require all staff involved in supervision to have earned this credential—or even to be working toward it. Bowman argued that “[r]egulated entities should be able to expect that all of our examination and supervisory teams have achieved or are working to achieve this level of professional expertise.” She committed to prioritizing examiner training and credentialing going forward to help maintain a safe and sound banking system.
Bank Capital
Bowman then turned to capital requirements. While acknowledging their central role in promoting financial stability, she cautioned that reforms often “take a piecemeal approach to capital requirements […] without considering whether proposed changes are sensible in the aggregate.” In her view, a piecemeal approach risks producing a capital framework that is poorly calibrated and internally inconsistent. Instead, she argued for a more holistic evaluation to ensure that all elements of the framework work in concert to capture risk appropriately.
By focusing narrowly on capital requirements, Bowman warned, the Fed can inadvertently create market distortions—encouraging certain activities while discouraging others in ways that may conflict with the goal of maintaining a safe and sound financial system and broader economic stability. For instance, she noted that under the current approach to leverage ratios, “banks are less inclined to engage in low-risk activities like Treasury market intermediation and revise their business activities in a way that is neither justified nor responsive to their customer needs.”
Consistent with her earlier call for a more tailored regulatory approach, Bowman emphasized that while the capital framework for smaller banks is simpler, it must still be carefully calibrated to ensure it supports both the institutions themselves and the communities they serve. To that end, she said the Fed will take a closer look at capital requirements for small banks, including whether adjustments are needed to better support their role in the broader financial system.
Regulatory Review
Some of Bowman’s most substantive remarks addressed the sharp increase in bank regulation since the passage of the Dodd-Frank Act. While she acknowledged that many post-crisis reforms were warranted, she argued that many of them “were backward looking—responding only to that mortgage crisis—not fully considering the potential future unintended consequences or future states of the world.” In her view, it is time to reexamine whether these regulations still make sense—particularly given the tradeoffs they entail.
Bowman emphasized that the purpose of regulation is not to eliminate all risk from the banking system. Attempting to do so, she argued, “is at odds with the fundamental nature of the business of banking.” Instead, regulators should foster an environment in which banks can “earn a profit and grow while managing their risks.” The role of the regulator, in her view, is to ensure that banks take prudent risks—not to prevent risk-taking altogether. Nor should the goal be to “prevent banks from failing or even eliminate the risk that they will.” Rather, the regulatory framework should “make banks safe to fail, meaning that they can be allowed to fail without threatening to destabilize the rest of the banking system.”
Bank Applications
Bowman concluded with a discussion of the regulatory application processes governing the chartering of new banks, bank mergers, and other actions requiring regulatory approval. She argued that the process “should reflect both (1) transparency as to the information required in the application itself, and the standards of approval being applied, and (2) clear timelines for action.” In her view, streamlining the process in this way could encourage the formation of new banks and reduce unnecessary delays.
Taken together, Bowman’s remarks offer a clear vision for a more focused, flexible, and transparent regulatory regime—one that emphasizes core financial risks, respects institutional diversity, and avoids the unintended consequences of one-size-fits-all policymaking. Her agenda suggests a shift away from expansive, process-driven oversight toward a more disciplined, risk-based approach that supports innovation and allows the banking system to evolve without compromising its resilience. Whether and how this vision shapes actual regulatory practice remains to be seen, but it marks a notable effort to recalibrate the Fed’s supervisory framework.
